Thursday, January 29, 2009

Yesterday's press conference at the IMF, Olivier Blanchard,Economic Counsellor and Director of the Research Department, began with an acknowledgment that he is a bearer of bad news: global output and trade are decreased; growth forecasts are being revised continually downward. As far as outlook, Blanchard reported that the global economy will come to a "virtual standstill" with just 1/2% of growth for 2009. The global financial crisis has taken a toll on different economies in different ways. In terms of developed economies, investor and consumer confidence is lower, making the cost of credit higher and less available. In emerging economies, the effect is different: (1) there is weaker external demand from developed countries for goods; (2) the global credit crunch has limited credit and increased the cost of credit; and (3) there is a decline in cost of goods exported.

The IMF's solution? Simply restoring financial health. Easier said than done, it would seem. The difficulty is one that still eludes us regarding the toxic assets that are still present on the balance sheets of banks. Much is said about the fiscal policies and government stimulus efforts, with a recommendation for proposals that emphasize government spending, rather than tax relief to have the quickest effect. Of course, the long term concern is the ability for governments to reverse the deficits that are created in the near term. Thankfully, the IMF is expecting the United States to return to a low level of growth (1%) by 2010.

Lately, there has been a daily dose of bad news with company layoffs. Today's news was of 13,000 job cuts today and 110,000 for the week. Today's casualties include AstraZeneca, Eastman Kodak, Cessna, Oshkosh and Charles Schwab.

Tuesday, January 27, 2009

In November, I posted about a case alleging that credit card issuers violated the antitrust laws by agreeing to include arbitration provisions in all of their cardholder agreements. Judge William Pauley, in the Southern District of New York, initially dismissed the suit for lack of standing, reasoning that any injury would be contingent on future disputes that cardholders might be forced to arbitrate. The Second Circuit reversed, holding that an agreement not to compete on a critical contract provision deprived the plaintiffs of a meaningful choice and thus resulted in injury in fact. Ross v. Bank of America, N.A., 524 F.3d 217 (2nd Cir 2008).Discover responded by moving to dismiss the complaint against it on the ground that its arbitration provision permitted cardholders to opt out within 30 days, and thus its cardholders were not compelled to artibitrate claims as a result of any anticompetitive agreement. The language of the agreement is available here, but you’ll have to scroll down a little to find it.On January 22, Judge Pauley rejected Discover’s motion, reasoning that whether Discover cardholders had a meaningful opportunity to reject arbitration provisions could not be resolved on the pleadings. “Accepting the plaintiffs allegations as true,” the court explained, “an opt out provision may be illusory [and t]he issue requires discovery.” This is particularly true, the court reasoned, because the plaintiffs alleged that the defendants conspired to prohibit their cardholders from challenging card issuer behavior through class actions. Interestingly, the court recognized that the plaintiffs were harmed because without the class action option, cardholders could not rely on the class action plaintiffs bar to monitor card issuer conduct. The court also held that by citing meetings between Discover and American Express, the plaintiffs brought their conspiracy allegations beyond the Twomblyspecificity threshold required to support a class action complaint. The court did deny plaintiffs request for a jury trial on the ground that the relief sought was entirely injunctive in nature. In re Currency Conversion Fee Antitrust Litigation, 2009 WL 151168(S.D.N.Y. 2009).

Monday, January 26, 2009

Visa, MasterCard, and the European Commission have been jockeying for over a year with respect to cross-border interchange fees. The EC's desire to spur on the introduction of the Single Euro Payment Areas ("SEPA") direct debit program may help bring about an agreed solution.

Interchange fees are charges paid by merchants to accept credit cards. Although these fees are imposed by the card systems, they do not compensate the systems for any service provided. Instead, they are passed on to the bank that issued the card to help support its card-issuing business. The EC has focused particularly on the charges imposed when a card is used outside the country in which it was issued.Interchange fees have raised competitive concerns in the US and Europe for decades. Card systems have long argued that these fees are necessary to provide a sufficient return to card issuers. In recent years, however, that justification has been attacked on multiple fronts. A multi-district class action filed by U.S. merchants is on-going, and, in other countries, competition regulators have struggled to find viable alternatives.

The concern with interchange fees stems from two market factors. First, the merchants are generally unable to pass the fees on to card users. In some cases, merchants are legally prohibited from surcharging card transactions; in others card systems’ rules prohibit surcharging; and in any event, surcharging may not be practical for many merchants. Because merchants cannot assess these fees only on card users, they may simply increase their prices across the board. All consumers would thus pay higher prices to enable some to use cards. And, even those who use cards might not if they were required to bear the full cost of card use.Second, system rules and competitive considerations require many merchants to accept all cards issued on the largest systems, Visa and MasterCard. As a result, individual card issuing banks within the Visa and MasterCard systems need not compete on interchange fees to attract merchants to accept their cards.

In the U.S., merchants have sought the right to surcharge and an injunction against card issuers setting interchange fees cooperatively through Visa and MasterCard. In other countries, regulators have 1) permitted surcharging and/or 2) limited interchange fees to an amount necessary to cover only certain costs of card issuing.The EC recently found that MasterCard’s method of setting cross-border interechange fees was anticompetitive, holding that an open card system must limit interchange fees to the extent that they “contribute to technical and economic progress that benefits consumers.” The Commission has been investigating Visa’s fees as well. While MasterCard is fighting the determination against it, Visa has been seeking to negotiate an acceptable interchange fee with the EC.

The EC has likely entertained Visa’s efforts because it is struggling to determine an appropriate method of interchange fee setting. Although current fees may be supra-competitive, eliminating interchange fees entirely could result in an inefficient drop in card issuance.

Recently, the negotiations have been impacted by the EC's desire to encourage a European-wide direct debit system in which cardholders could 1)use cards across Europe and 2) have the cost of the transaction deducted directly from their home bank. The banks claim that they are reluctant to support the direct debit plan if a cloud of uncertainty continues to hang over the interchange issue. EC competition commissioner Neelie Kroes recently recognized the need for an interchange system to get the direct debit program off the ground. “It may prove necessary,” she said, “to have a multi-lateral interchange fee for cross border SEPA Direct Debits.” But she wants to limit those fees to the “very initial stage” of the program. Whether that will be enough for many banks to back the debit system remains to be seen.

Wednesday, January 21, 2009

Watch your credit card and bank debit statements carefully over the next few months. The New York Times reports that a major processor of card transactions (Heartland Payment Systems) has disclosed that unencripted data was "sniffed" by thieves over the past several months at the point in transactions where the processor asks for authorization from the issuer network (VISA, MasterCard, Discover, AmEx). Tens of millions of credit and debit cardholders are potentially exposed to card data theft and subsequent fraud.

Heartland has set up a website explaining what happened and noting that "Cardholders are not responsible for unauthorized fraudulent charges made by third parties." Recall that the Truth in Lending Act (TILA) § 133 (codified at 15 U.S.C. § 1643) shields credit card holders from liability for unauthorized charges beyond the first $50, and I suspect Heartland's release reflects the credit card issuer networks' near universal policy these days to waive even the first $50 of liability. As for debit card fraud, at least for consumer accounts, the Electronic Fund Transfers Act (EFTA) § 909 (codified at 15 U.S.C. § 1693g) provides more or less parallel protection, though with some complicated expansions of liablity for consumers who are not vigilant about reporting fraudulent activity. Though the Heartland release mentions only "charges" (not debits), I understand that the major debit processing networks have a similar "zero liability" policy for fraudulent debits, waiving the first $50 and perhaps the expanded liability, as well.

All of this does the victimized consumer little good, though, if s/he doesn't notice and report the fraud (either to avoid paying a fraudulent charge or to request a refund of a fraudulent debit). So watch your statements carefully, and be thankful we're not in Europe, whose laws generally do not protect consumer card users as generously as TILA and EFTA.

Tuesday, January 20, 2009

David Brooks of the New York Times has of late been a big advocate of behavioral economics, as this column from October initially laid out. Last week, Brooks again raised his argument that the economic collapse has irreversibly exposed the flaws in classical economic theory:

Once, classical economics dominated policy thinking. The classical models presumed a certain sort of orderly human makeup. Inside each person, reason rides the passions the way a rider sits atop a horse. Sometimes people do stupid things, but generally the rider makes deliberative decisions, and the market rewards rational behavior.

While the classical model is hardly the quaint ancient history that Brooks' rhetoric suggests, I do agree with Brooks that the current crisis can be traced in part to a fantastical belief about both the nature of persons and of markets. It is also nice to see that others are moving toward acceptance that there may be a significant role for government and law to play in market regulation. It would have been much nicer to see that move occur prior to the complete meltdown of the economy, the destruction people's lives and livelihoods, etc. That's an argument for ex ante versus ex post regulation, I guess.

Even if the King is dead, I am less certain than Brooks seems to be that the natural successor to the throne is behavioral law & economics. Such a move could be seen as simply a mere substitute of a new mode of "mechanistic thinking" (to paraphrase Brooks' criticism) to address the problem. I guess it could be argued that the crisis has exposed the weaknesses not of one economic model for regulation, but of all economic models for regulation. But, if that is the case what are we left with? In any event, we are no doubt in the midst of a major shift in attitudes toward legal intervention into markets, and it will be interesting to see what insights behavioral economics has regarding solutions to the problems.

Friday, January 16, 2009

Jamie Dimon just doesn't get it. I suppose it's his job as CEO of JPMorganChase not to get the point about the need for reasonable mortgage modification to avoid unnecessarily wasteful foreclosures that are deepening (causing?) the current economic mess we're in. The Financial Times reported yesterday that Dimon strongly opposes--surprise, suprise--current bills in Congress that would allow bankruptcy judges to value claims secured by principal residences at the realistic, current value of the home, rather than the fanciful, contrived value on which the mortgage was based. This isn't the place for a drawn-out explanation of "mortgage strip-down," but suffice it to say that the current bills bring the treatment of principal residence mortgages into line with the treatment of other secured claims (it's actually more involved than this, but this is the takeaway point for non-specialists).

As a policy matter, thess bills essentially punish banks (and MBS securitization trustees and servicers) for unreasonably refusing requests for modifications of distressed mortgages (that in most cases help the banks/investors to avoid major losses in foreclosure). If the lending industry had responded to Congress and supported reasonable modifications before, these bills wouldn't be in the hopper. But these banker folks are now infamous for their unreasonableness (recall, these are the same rocket scientists who valued my home at a discount to actual recent sales prices for identical homes in my townhome association because the other places had been on the market too long!). Now, Dimon will have to lie in the bed that he and his like have made. One of these bills very likely will pass, probably the Durbin bill, behind which even Citigroup and other lenders have thrown their support.

Dimon invites us to feel sorry for the banks, whom this bill would put "at the mercy of the vagaries of the courts." This is ridiculous, as the bill does no such thing--the market value of the property defines the value of the bank's claim. There's no judge discretion or beating up on mortgagees going on here; it's simple market economics. And by the way, Dimon clearly has no problem with borrowers being at the mercy of the vagaries of the market . . . What goes around, comes around.

Dimon's main argument against this bill is the same old, tried-and-true argument that every economist/banker/fill-in-the-conservative-blank levels against any kind of consumer protection or market regulating legislation: it will make banks less willing to lend for fear that loans will be modified or destroyed in bankruptcy. For Heaven's sake, when will bankers stop making this utterly ludicrous argument. First, perhaps a bit less lending is exactly what the doctor ordered, at least less lending to the droves of people who should never have received loans on the terms that these banks and brokers foisted on them in the past several years (leading to our current predicament). Second, no amount of consumer protection has ever inhibited banks from lending, either here or in other countries, even after banks have made their "sky is falling" arguments before passage of legislation (see, e.g., the broad-ranging adoption of consumer bankruptcy in Europe over the past 20 years--lending certainly hasn't ground to a halt there!). Finally, the Durbin bill (as amended in the deal to secure Citigroup's support) applies only to mortgages already existing--not to prospective mortgages. This tired argument about "we will be hesitant to lend if you pass this law" is totally off the mark with respect to the Durbin bill.

My favorite comment: Dimon warns that passage of the bill will "lead to an increase in personal bankruptcies." Well, no @#$%, Sherlock! That's the whole point. We wouldn't need more bankruptcies if the bankers would act reasonably in dealing with the foreclosure crisis, but since they've amply demonstrated that they're incapable of dealing with it responsibly, Congress is stepping in. This is like criticizing the release of a new cancer drug for fear that it will lead to more doctor visits by sick people. Indeed!

Thursday, January 15, 2009

Law.com reports that Bank of America and Citibank stand to lose in excess of $51 million because Bank of America, acting on its own behalf and as Citibank's agent, terminated both banks' financing statements against the former law firm of Heller Ehrman in August 2007, some 14 months before Heller Ehrman filed bankruptcy. As we all know, UCC § 9-317(a)(2) and 11 U.S.C. § 544(a)(1), collectively, generally give a bankruptcy trustee (or a debtor-in-possession) priority over any security interests that were unperfected when the debtor filed bankruptcy. That's bad enough news for Bank of America's and Citibank's apparently unperfected-at-filing security interests. (Bank of America and Citibank have argued that an October 2008 "correction" revived their perfection well before Heller Ehrman filed bankruptcy and had the effect of making the banks perfected when Heller Ehrman paid them. Heller Ehrman counters that the "correction" did not cure the banks' lapse in perfection.)

But, wait, it appears to get worse. Less than 90 days before Heller Ehrman filed bankruptcy, and well after Bank of America terminated its and Citibank's filings, Heller Ehrman paid the banks $51 million of the firm's outstanding debt. Under 11 U.S.C. § 547(b), the payment looks like an avoidable preference, which the banks may have to refund to the bankruptcy estate.

With Pillsbury Winthrop Shaw Pittman on one side and GreenbergTraurig on the other, this dispute figures to be hotly contested and should be interesting to follow.

At last week's AALS annual meeting in San Diego, those attending the AALS Section on Commercial and Related Consumer Law's Friday business meeting voted our own Keith A. Rowley (UNLV) to be the section's chair-elect and fellow blogger A. Brooke Overby (Tulane) to be an at-large member of the section's executive committee. Amelia H. Boss (Drexel) is the new section chair and immediate past chair Kevin E. Davis (NYU) and at-large members Neil B. Cohen (Brooklyn) and Gregory E. Maggs (GWU) round out the executive committee.

UPDATE: The AALS informed us that Amy Boss was ineligible to serve this year because Drexel is not yet a member school. Consequently, Keith Rowley becomes chair a year earlier than planned, Greg Maggs is the chair-elect, and Emily E. Kadens (Texas) is our new at-large member.

This post is both silly and serious. On the silly side, I just couldn't resist noting that the W$J today announced that Smurfit-Stone has warned its lenders that it may seek bankruptcy. I can't see that name without thinking of the little blue guys of my youth (I had a small collection of the cute little characters). On the serious side, Smurfit is a sort of bellwether for the economy, as it produces cardboard boxes of every size and shape. When consumers stop buying things that go in boxes, companies like Smurfit are on the other end of the chain of businesses that suffer. When the pain reaches that far, we know we're really in serious economic trouble (as if that weren't clear already). Brace yourself for many more announcements like Smurfit's in coming months.

Monday, January 12, 2009

I don't want to seem too gleeful about this, but we insolvency professionals are likely to be in the spotlight for a while during this Year of the Bankruptcy. I'm surprised it took so long for the W$J to come out with the first such story of 2009, but today's Marketplace section (on B1) announced a Wave of Bankruptcy Filings Expected From Retailers in Wake of Holidays. The current period, unprecedented in so many ways, will likely see an unprecedented and massive restructuring of the U.S. retail sector. Much of the activity will be liquidations, it seems to me, whether out of bankruptcy altogether, under Chapter 7, or even in liquidating Chapter 11 plans. Our unsustainable reliance on out-of-control consumer spending seems to have met its demise. Or maybe this will be a temporary lull, with consumers pulling out the stops once the job market rebounds. One way or another, 2009 will be a rough one for many. Here's hoping that this year can also be marked as the Year of the Great Recovery.

Thursday, January 8, 2009

In case you missed it (especially for those at the AALS Conference), here is Obama's speech today at George Mason University on the economy. Obama calls immediately for an American Recovery and Reinvestment Plan (the "Plan"). The Plan will create up to 3 million new jobs for Americans over the coming years, focusing on investment in energy, education and healthcare to help America remain competitive. The Plan will include infastructure projects, tax cuts, and extension of unemployment benefits. Obama acknowledged the cost of economic recovery, but stressed greater accountability for government spending.

Obama asked people to consider not what is good for me, but "what is good for the country my children will inherit." A very good speech. Now, hopefully action is not far behind. What exact form that action will take is probably the biggest unresolved question. There is sure to be political wrangling about what projects are most important and the cost.

"The U.S. regulatory structure reflects a system, much of it created over seventy years ago, grappling to keep pace with market evolutions and, facing increasing difficulties, at times, in preventing and anticipating financial crises."

-The Department of the Treasury Blueprint for aModernized Financial Regulatory Structure(released in March 2008)

The University of Memphis Law Review is pleased to announce its annual Spring Symposium to be held at The University of Memphis in Memphis, Tennessee. This symposium will explore the myriad legal and policy issues surrounding federal regulatory reform governing financial institutions. In early 2008, the Department of the Treasury issued a Blueprint for a Modernized Financial Regulatory Structure, which is the most recent of a long line of careful studies addressing the Federal regulatory structure applicable to financial institutions. The Blueprint was a response to mounting concerns about the performance, safety and health of financial institutions. It was intended to modernize government’s approach to preserving market stability, enhancing U.S. competitiveness in the global marketplace and promoting consumer protection.

Since the Blueprint's release, turmoil in world financial markets has grown significantly. The U.S. economy is in the midst of perhaps its most severe contraction since the Great Depression. Many in government, business, the press and the academy blame the current financial crisis on excessive governmental deregulation of financial markets. Others point the finger at negligent regulators, meddling political players, faulty assumptions and underlying structural failures. Regardless of where fault can best be rested, it is clear that today’s regulatory framework for financial services needs serious reexamination and perhaps deep reform, both to correct current ills and to guard against future problems.

This symposium will focus on a broad range of topics concerning the short and long term goals of and approaches to financial services reform, including those set forth in the Blueprint and others surfacing since it was released. Presenters will discuss their ongoing scholarship in areas pertinent to today’s financial markets crisis. The specific topics of that scholarship (risk-based regulatory objectives, the impact of unfolding Federal bailout legislation, accounting and financial reporting, consumer protection) will afford springboards throughout the day for broader-ranging discussions and commentary by panelists.

CLE Credits

The Law Review has requested CLE credit approval for 4.5 general hours from Tennessee, Mississippi, and Arkansas.